Advanced level economics paper 3 north west mock 🥳🔥

a)

Step 1: Define the components of aggregate expenditure.
The aggregate expenditure (AE) in a three-sector economy is given by:

$$AE = C + I + G$$

Where $C$ is consumption, $I$ is investment, and $G$ is government spending.

Step 2: Formulate the consumption function.
Consumption ($C$) depends on autonomous consumption ($C_a$), the marginal propensity to consume (MPC), and disposable income ($Y_d$).

$$C = C_a + MPC \cdot Y_d$$

Disposable income ($Y_d$) is total income ($Y$) minus direct taxes ($T$).

$$Y_d = Y - T$$

Given $C_a = 100$ billion FCFA, $MPC = 0.8$, and $T = 0.1Y$.
Substitute $T$ into the disposable income equation:

$$Y_d = Y - 0.1Y = 0.9Y$$

Substitute $Y_d$ into the consumption function:

$$C = 100 + 0.8(0.9Y)$$ $$C = 100 + 0.72Y$$

Step 3: Substitute all components into the aggregate expenditure equation.
Given $I = 300$ billion FCFA and $G = 200$ billion FCFA.

$$AE = (100 + 0.72Y) + 300 + 200$$ $$AE = 600 + 0.72Y$$

Step 4: Calculate the equilibrium level of national income.
Equilibrium occurs when aggregate expenditure equals national income ($Y = AE$).

$$Y = 600 + 0.72Y$$ $$Y - 0.72Y = 600$$ $$0.28Y = 600$$ $$Y = \frac{600}{0.28}$$ $$Y = 2142.85714...$$

Rounding to two decimal places:
The equilibrium level of national income is $\boxed{\text{2142.86 billion FCFA}}$.

b)
The equilibrium level of national income calculated in (a) is $Y_e = 2142.86$ billion FCFA.
The full employment level of income (potential income) is given as $Y_f = 3,000$ billion FCFA.
Since $Y_e < Y_f$ ($2142.86 \text{ billion FCFA} < 3,000 \text{ billion FCFA}$), the economy is experiencing a deflationary gap.
Reason: The equilibrium level of national income is below the full employment level. This indicates that the economy is operating below its potential, leading to unemployment and underutilization of resources.

c)

i)
To represent the situation on a graph:

• Draw a graph with National Income (Y) on the horizontal axis and Aggregate Expenditure (AE) on the vertical axis.
• Draw a 45-degree line from the origin, representing the condition where $AE = Y$.
• Plot the Aggregate Expenditure function $AE = 600 + 0.72Y$. This line will intersect the 45-degree line at the equilibrium income.
• Mark the equilibrium income $Y_e = 2142.86$ billion FCFA on the horizontal axis where the AE curve intersects the 45-degree line.
• Mark the full employment income $Y_f = 3,000$ billion FCFA on the horizontal axis to the right of $Y_e$.
• At $Y_f = 3,000$ billion FCFA, the Aggregate Expenditure curve will be below the 45-degree line. The vertical distance between the 45-degree line and the AE curve at $Y_f$ represents the deflationary gap in terms of aggregate expenditure.

ii)
To close a deflationary gap, the government needs to stimulate aggregate demand. Two measures are:

1. Increase government spending (G): A direct increase in government expenditure on goods and services directly boosts aggregate demand.
2. Decrease direct taxes (T): A reduction in direct taxes increases disposable income for households, leading to higher consumption and thus an increase in aggregate demand.

d)

Step 1: Calculate the income gap.
The income gap is the difference between the full employment income and the equilibrium income.

$$\Delta Y = Y_f - Y_e$$ $$\Delta Y = 3,000 \text{ billion FCFA} - 2142.86 \text{ billion FCFA}$$ $$\Delta Y = 857.14 \text{ billion FCFA}$$

Step 2: Calculate the government spending multiplier.
The multiplier ($k_G$) in an economy with taxes is given by:

$$k_G = \frac{1}{1 - MPC(1-t)}$$

Where $MPC = 0.8$ and the tax rate $t = 0.1$.

$$k_G = \frac{1}{1 - 0.8(1-0.1)}$$ $$k_G = \frac{1}{1 - 0.8(0.9)}$$ $$k_G = \frac{1}{1 - 0.72}$$ $$k_G = \frac{1}{0.28}$$ $$k_G = \frac{100}{28} = \frac{25}{7} \approx 3.5714$$

Step 3: Calculate the required change in government spending.
To close the income gap, the change in income ($\Delta Y$) must be achieved through a change in government spending ($\Delta G$) using the multiplier:

$$\Delta Y = k_G \times \Delta G$$ $$\Delta G = \frac{\Delta Y}{k_G}$$

Using the precise fractional values:

$$\Delta G = \frac{\frac{6000}{7}}{\frac{25}{7}}$$ $$\Delta G = \frac{6000}{25}$$ $$$$